Tuesday, November 18, 2008

Why Thomas Friedman Is Stupid

Here’s our Bronx-summary of the past few years’ worth of what Thomas Friedman has had to say about the domestic automakers: You’re stupid Detroit, yeah all of youse in Michigan too! Ya bums been making crap product forever and pay off DC’s lobbyists to get your way! You guys support terrorists! Shame on you! And you car guys - dumb! Get out of here, all of ya! SUVs, trucks, they all make me wanna puke! Ya should be making hybrids damn it! Below are a few quotes from Friedman OP Ed pieces published on the NY Times website: “Is there a company more dangerous to American’s future than General Motors?” “How can these companies be bad for so long? Clearly a combination of a very un-innovative business culture, visionless management, and overly generous labor contracts.” “In return for any direct government aid … the board and management [of GM] should go … someone hard nosed and non-political should have broad power to revamp GM … this will mean tearing up existing contracts with unions, dealers, and suppliers … must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability … somebody ought to call Steve Jobs who doesn’t need to be bribed to do innovation.”

Philip Pullman wrote the book, “The Golden Compass.” It is one book in a fantasy trilogy about parallel worlds that one can move in and out of through windows. Each world is subtly different from the others. It’s a sure bet that Thomas Friedman was a source of inspiration for Pullman. Friedman came from another world where Clive Cussler got a Nobel Prize for literature, American Pie II got an Oscar for best picture, and Tommy-boy got his Pulitzer. Again, from the internet (Dictionary.com), Stupid means: lacking ordinary quickness and keenness of mind; characterized by or proceeding from mental dullness; foolish; tediously dull, esp. due to lack of meaning or sense; inane; pointless: a stupid party; annoying or irritating; troublesome. Most children are told not to use the word “stupid”. Instead, we are urged to use the word “ignorant.” You should reserve the word “stupid” only for the profoundly ignorant. Friedman is profoundly stupid. Too bad he has a lot of influence. We hear a lot of television commentators chirping Friedman songs that have no relationship to the facts. Rather than spend a couple of hours studying a little history, Friedman is one of those “smart” stupid people, like Karl Rove, who would rather focus their intellectual powers on defending their non-fact-based view of the world.

In a nutshell, Friedman thinks: (1) the domestic automotive executives are without talent, (2) that they should only be making hybrids, (3) that there is vacuum of innovation in Motown, and (4) that they’ve been ”bad for so long.” His stupidity, therefore, has at least four dimensions. The first three are easy to prove wrong; however, most of this blog is focused on history.

Tommy, if you really are as smart as you think, how well would you do in strategically managing a car company’s fixed costs that are governed by a plus-thousand page labor relations rule book? How do you sing proud of your liberal politics with one voice and fix, with another voice, those “dinosaur companies” you deplore by hacking away at wage rates, health benefits, and working conditions? If you are really this smart, go get a job with Barack and help him fix the carnage that the folks a bit downtown from you wrought.

First, let’s talk about talent. Ford is run by Alan Mulally, a 37 year veteran of Boeing. This guy is a ringer if ever we saw one – he is turning Ford around, albeit, somewhat painfully. American Honda is a breathtakingly brilliant company whose top American executives are Dick Colliver (ex-Chrysler) and John Mendel (ex-Ford.) GM’s Bob Lutz is the guy who saved Chrysler the second time around, and we have never met anyone who is not awed by his passion and intellect. We suspect Lutz feels the same way about Rick Wagoner – Rick and Chrysler’s Jim Press are just about the two smartest people we have ever met. Renault’s management prodigy, Carlos Ghosn, runs Nissan worldwide; Renault exited the very tough US market in the late 1980s (remember the LeCar) and still has not come back. Chrysler is run by Bob Nardelli, the no-retail-experience ex-GE guy who saved, and grew, Home Depot using Six-Sigma. He doubled sales and doubled profits there. His second in command is a true genius, Jim Press, who used to run Lexus and Toyota Motor Sales – he’s no slouch. Chrysler did what Tommy suggests for GM; Chrysler retired their leadership, brought in the best talent in the world, and nuked their board of directors. So, given Chrysler’s struggles, world class talent and oversight probably is not the silver bullet here. Every player in this industry has a wealth of talent at the top – simply changing them out is not the answer. You are wrong Tom.

Ok, now to hybrids. Tommy, look about 12 inches down in this blog and you will see a Wall Street Journal web-chart that shows motor vehicle sales through October, 2008. You will see that Toyota Prius sales are down this year by 5.3% and were down 10.3% in October. Ford Focus sales were up 20.5% in the first 10 months of 2008, and the Focus outsells the Prius. Hmmm. Maybe the market is telling us that hybrids are not the complete answer? Maybe car companies do not have a social responsibility to cram products down the throats of customers that they do not want? Maybe. Tommy, you are dumber than a door nail on this one.

Innovation. Tom-boy uses Steve Job’s name as an incantation to show what he means by innovation. Let’s focus on just one example: GM’s OnStar telematics capability. GM has the highest telematics install base of any OEM in the world. Ford, working with Microsoft, (sorry, Mr. Jobs, we know how you feel about those guys) recently introduced a competing product called “Sync.” Sync is at least 5 years behind OnStar. What does OnStar do? It tells you if anything is wrong with your vehicle. It sends you an email telling you if your tire pressure is OK (tire pressure was linked to certain vehicle roll-over problems). It is linked to MapQuest, so you can download a trip plan from your PC to your car. It calls an ambulance if you crash. It tells you how to get out of the path of a hurricane. It responsibly stops your vehicle if it is stolen, and it can open the doors if you lock yourself out. It is a world class nexus of innovation and social responsibility. If Tommy can’t call this world class “innovation”, then we’d call this prima facie evidence of his stupidity.

History. Rather than simply compile a list of Friedman “historical” stupidities, let’s first lay the simple foundation of how the US automobile industry has evolved over the past 83 years.

Three important early years to remember: 1935, 1937, and 1947. The 1935 National Labor Relations Act (NLRA) created closed shops, where a condition of employment could be forced membership in a union. Back in May 26, 1937 pictures were taken of Ford enforcers beating UAW official, Richard Frankensteen (believe us, this is the correct spelling), in the Battle of the Overpass. Beating labor organizers was a very bad idea. In 1947, the Taft Hartley (Right to Work) Act undid NLRA if states so chose to do so. Twenty two states are now Right to Work states. The states that are not Right to Work generally are the ones that have/had a significant portion of their employment in labor unions – automotive and other. Tommy, pay attention here this is important. The UAW became the most powerful labor union in the world over the course of 83 years. Besides grizzly pictures of getting beaten up, they have leverage. The UAW continually refined their labor contracts with each of the domestic automakers through pattern bargaining, where the current national agreement “rule book” is longer than James Cavell’s Shogun. Compare this to the rules of chess in Wikipedia – chess rules contain 3,993 words and prints to 13 pages including loads of graphics. Years ago the domestics incrementally, in pattern formation, negotiated away their ability to reinvent themselves in non-Right to Work states. And, with that, the door was opened for serious competition.

From 1947 to October 15, 1973 all this labor legislation really didn’t matter much. Gas was cheap. We all loved what the domestics served up, and many still are fans of the fins of the 50’s and flames of the 60’s. Volkswagen was the big importer of record, but not a threat to the Big-3. They served a small niche market (of about a half million units) of folks who wanted small fuel efficient cars. The “big” (actually, it was quite little) threat VW represented in 1963 was in pickup trucks. West Germany tripled their tariffs on imported frozen chickens, and the US retaliated with the “Chicken Tax.” A 25% import tariff on pickups. Colonel Sanders must have been proud. Toyota, Honda, and Datsun were tiny players in the market, selling cars that were born in the Japanese market for Japanese regulations, economics, and sensibilities. Small and fuel efficient. Unfortunately, Oil Shock 1 was born on October 15, 1973 with the OPEC oil embargo. Almost overnight, huge lines formed at gas stations and fuel prices skyrocketed. The issue here was more in short supply than long prices. In 1979 Oil Shock 2 was born with the Shah’s leaving and the start of the Iranian Revolution. Longer gas lines, higher prices. For six years nobody knew what to do about OPEC and uncertainties concerning the flow of gasoline to filling stations. Most thought we would return to “Pleasantville” normalcy. Product development cycles, to this point, had been in the 4-5 year range for the domestics. So, the domestic OEMs were looking down a long garden hose to see the future and then place their multi-billion dollar bets. Everybody knew back then that there was a practically infinite supply of oil. So, they hesitated. Meanwhile, a tidal wave of car buyers flowed to the small, fuel efficient car producers and Motown became, product-wise, flat footed. Chrysler started to teeter and hired Lee Iacocca from Ford in 1979. They were the most flatfooted of all and needed a Federal loan guarantee to avoid bankruptcy. They got it. In 1981 the Reagan administration enacted the Voluntary Restraint Act (VRA) where the Japanese OEMs would voluntarily limit exports to the US while the domestics retooled and became more competitive. This was a 2-Prong rescue. In the midst of this the K-car and minivans were born. But, haste makes waste. In 1981 JD Power published their first customer satisfaction index (CSI) for the auto industry.

At this point, if Bobby Fischer had been running General Motors, he’d have pushed over his king, conceded, and said, “checkmate in 27 years.”

Tommy, even with your pea-sized intellect, you could have won playing with this board. The Chicken Tax effectively prevented the Japanese OEMs from entering the pickup truck market, so this was an effective open prairie for the domestics to retreat to and harvest. The VRA was only focused on Japanese imports into the US. So, Hyundai (Korean) entered the market unfettered in 1986 (they set a first year sales launch record by selling 126,000 Excel models) and Kia (Korean) followed in 1994. Imports into the US were limited by the VRA and the Chicken Tax, so the Japanese built assembly plants in the US. Tom-boy, now this is a reading comprehension test - where did they build them? Why, of course, they built them in those largely non-union 22 Right to Work States! No UAW work rules, aged workforce, retirement benefits. But, they were smart; over time they paid their workers pretty much the same as the UAW. Sarah Palin’s 25-something Joe-Six-pack really didn’t have much to think about when UAW organizers spoke to him. “Hmm, do I risk losing my job and support the UAW, for nothing, or do I continue to work for this, hey, pretty good company?” No contest; no UAW. The Japanese transplants all-in costs were significantly lower than UAW shops, because they had modern, tax abated facilities without UAW work rules. They evolved faster and became ever-higher quality and more efficient. All the while, the domestics were trying to catch up; but, because of Oil Shock 1 paralysis, they were largely one product development cycle behind. The Japanese OEMs refined their fairly-small-car-but-getting-bigger product strategy in the 1980s and focused on quality – David Power was a hero. David Power developed charts that showed how good the Japanese cars were, and how bad the domestics were. He changed the rules of the game, but the domestics did not pay close enough attention. In the 1980s, while the Japanese were focused on better of the same, the domestics were producing worse, but different. Customers noticed and flocked to the Japanese cars, creating an undersupply situation that lasted for about 24 years. Fundamental economic theory prevailed, and these scarce commodities were priced up, resulting in high profits and high investment capital for the Japanese OEMs. Much of this became increasingly apparent to the domestic OEMs by early 1990. They were one product development cycle behind, producing inefficiently as measured by Jim Harbour, and running as fast as they could to compete with the Japanese on JD Power’s CSI quality scale. The Japanese owned the small car market, but that was irrelevant. The domestics couldn’t make money on small cars due to incredible competition, labor costs, and inefficient production. So, they fled to minivans, light trucks, and SUVs to make money much needed for quality improvements and product investment.

The boom of the post-recession 1990s was a loopy time in global business history. Internet companies grew huge market caps without P&Ls that made any sense at all. There was a pandemic of stupidity at that time that really had no boundaries. All business sectors were infected … including the auto companies. The internet had no boundaries; therefore “global” was the solution to all. Ford bought a slew of global luxury Marques, most of which have been sold. Daimler bought Chrysler and then sold it. GM bought a bunch of global tertiary players. Arnold Schwarzenegger bought one of GM’s first street-legal Hummers – a brand that appealed to our post-Desert-Storm sense of military pride and patriotism. Looking back, many businesses are now embarrassed about their mistakes. Many just plain old citizens look back, too, and wonder how we could all have been so stupid. But, we survived.

Gas prices crested over $3 a gallon during 2005’s Katrina, yet market share of the big stuff continued to grow. Hey, this is America, the big country with a Texan President – we drive big cars and big trucks! Well, yeah, until we can’t afford them anymore.Tom-boy, you prattle on and on about how bad domestic product is and blame this for the current predicament that they are in. Well, you are really talking about the stuff that was produced 20 years ago. That’s when the checkmate really occurred. Wake up and read what’s happening now, stupid. Product quality is not really a problem today. In 2007 Ford’s score in JD Power’s CSI was 868; the same as Toyota’s. Buick’s CSI was 918 (higher is better.) JD Power’s 2008 “Initial Quality Survey” (IQS) gives the edge to Toyota; for every 100 cars produced, they have 104 quality problems - a tad more than one per vehicle. For Ford the number is 112, and for Buick it is 118. Both of these are still just a tad over one per vehicle produced. Tommy, if you are right and folks don't want the products that the domestics are building, then why of the top 20 models sold through October do the domestics produce half of those that have increasing sales? Besides being stupid, you are incompetent.

What happened and why are the domestics teetering on bankruptcy in 2008? It would be wrong to exonerate them from all past sins. There are plenty of screw-ups to be tagged on lots of different companies. Toyota is a brilliant company. They just built a pick-up truck plant in Texas and are struggling to sell its production. Nissan produces some of the most beautiful cars in the world. They build their new full-sized Titan pickup in the US and are struggling with it. Why did Honda Civic sales go down by 22% in October? Circuit City, the darling of Wall Street a few years back, just declared bankruptcy. LG, Sharp, and Chungwa recently agreed to pay a penalty of $585 million for price fixing in the LCD market. Hey Tommy, China spends a lot more with lobbyists than the entire motor vehicle industry – and, by the way, what’s all this about them hacking into Obama’s computer systems? Screw-ups and mistakes happen and are part of life – it’s why they invented the word “forgive.”

So, besides normal mistakes, what happened? It is really quite simple. People buy motor vehicles from three sources of “funding.” (1) They use home equity loans to borrow and buy a car. Well, the subprime-induced housing debacle screwed this one up – we allocated $700,000,000,000 to help out the financial institutions that got us in this ditch. (2) They talk to family, friends, and spouses, look at their savings, and make a decision that they can afford a new vehicle. Nope. Wall Street’s economic crisis has wiped out about a third or more of their savings and the media has them scared out of their minds about losing their jobs. “Cut back!” is the media mantra today. They can’t “afford” to buy.We allocated $700,000,000,000 to help out the financial institutions that got us in this ditch. (3) They feel lucky and try to get a loan. Nah, even Paulson admitted that this part of the financing market has been practically nuked. We allocated $700,000,000,000 to help out the financial institutions that got us in this ditch. So, Tommy, you stupid moron, it’s all about cash flow that the boys downtown really screwed up. It’s not about bad product that customers don’t want. It’s not about quality that was fixed years ago. It’s about somebody else’s greed.All the information used to write this blog came from free access web sites that do not require a subscription, or proprietary Carlisle & Company sources.